The BCREA Commercial Leading Indicator (CLI) was down sharply in the first quarter of 2020 from 134.2 to 123.2, reflecting the slowdown prompted by the COVID-19 pandemic. Compared to the same time last year, the index was down by 4.8 per cent.

The pandemic-induced shutdown of the economy in the last two weeks of the first quarter of 2020 had a notable impact on the CLI, turning all components negative. On the economic activity component, manufacturing sales led the decline. On the employment component, a fall in key commercial real estate sector jobs was the primary driver. Meanwhile, the financial component had the largest negative impact on the CLI, as REIT prices tumbled and risk spreads widened in March. The underlying trend in the CLI was relatively flat in the previous six quarters, but has taken a sudden downward turn due to the pandemic. This suggests that going forward, the environment for commercial real estate activity in the province will be weak as the economy gradually re-opens, and temporarily unemployed individuals slowly return to work.

BC’s economy was beginning to slow in the last quarter of 2019, but the rate of slowing was exacerbated by the pandemic in the first quarter of 2020. A fall in manufacturing sales of both durable and nondurable goods were the main drag on economic activity. Also contributing to the drag, but to a lesser extent, were lower wholesale trade sales in motor vehicles, and building material and supplies. Meanwhile, although growth in retail sales was positive in the first two months of 2020, it was not enough to offset the 10 per cent monthly decline in March, as retail stores across the province were shut down halfway through the month due to the pandemic.

Employment growth in key commercial real estate sectors such as finance, insurance, real estate and leasing was negative for the first time since the summer of 2018, down by about 13,500 jobs in the first quarter. Additionally, manufacturing employment fell by about 1,830 jobs from the previous quarter.

The CLI’s financial component was negative in the first quarter of 2020 as growing fears of the potential impact of the pandemic resulted in a full market meltdown in late February, sending equity markets into free fall and government bond yields plummeting. However, private borrowing costs rose sharply due to elevated risk premiums, causing a tightening of credit conditions.

The Canadian economy contracted 8.2 per cent at a quarterly annualized rate in the first quarter, including a 7.2 per cent decline in March following the paralysis of economic activity brought on by the COVID-19 pandemic. Household spending fell 2.3 per cent, the steepest drop ever recorded, while exports were down 3 per cent and government spending fell 1 per cent due to school closures and government curtailments. Total housing investment was down 0.1 per cent, with both renovation spending and ownership transfer costs falling. New home construction, however, rose 1.6 per cent.

As dramatic as the first quarter decline appears, it will almost certainly be overshadowed by the potential for a 30 per cent or more annualized decline in the second quarter, when the impact of COVID-19 on the economy is expected to be the most severe. Note that those are annualized estimates. The actual peak-to-trough decline in Canadian real GDP is estimated at 10-15 per cent before things begin to normalize and growth rebounds in the third and fourth quarter of this year.

Canadian inflation, as measured by the Consumer Price Index (CPI) fell by 0.2 per cent in April year-over-year, down from a 0.9 per cent gain in the previous month. This was the first year-over-year decline in the CPI since September 2009. Energy prices were the main drag on inflation due to the drop in global demand, excluding this category, national CPI rose by 1.6 per cent year-over-year. Prices were also down for transportation (-4.4%), clothing and footwear (-4.1%) and recreation and education (-0.7%). In contrast, prices (3.4%) for food accelerated in April. The Bank of Canada’s three measures of trend inflation fell 0.1 percentage points, averaging 1.8 per cent in April. The CPI was negative in all provinces except for Quebec and BC.

In BC, CPI was flat in April year-over-year, following a 1.2 per cent increase in March. Gas prices continued to fall (-19.6%), along with prices for clothing and footwear (-7.4%), transportation (-2.4%), and goods (-2.2%). Clothing and footwear retailers had to drop their prices to clear inventory, but were restricted to online sales which meant fewer sales. Meanwhile, prices grew for health and personal care (0.9%), household furnishings (0.4%) and alcohol/tobacco/cannabis (0.3%). As BC begins to re-open retail stores and food service establishments, we hope April will represent a floor on price declines.

Seasonally-adjusted Canadian retail sales fell by a whopping 10% in March to $47.1 billion. The largest drop since the data became available in 1991. About 40% of retailers closed their stores mid-month due to the pandemic, while in the clothing sub-sector 91% closed. Sales were down in 6 of 11 sub-sectors, representing 39% of retail sales. Leading the drop were clothing stores (-51%), auto dealers (-36%), and gas stations (-20%). In contrast, sales were up at grocery stores (23%), health and personal care stores (5%), and general merchandise stores (6%).

The shutdown of physical stores caused many retailers to shift or expand their online presence. E-commerce sales were up by 40% in March year-over-year at $2.2 billion, accounting for almost 5% of total retail sales. This excludes Canadians purchasing from foreign e-commerce retailers.

Sales were down in all provinces, leading the decline were Ontario (-9%), Quebec (-16%), and Alberta (-13%). In BC, seasonally-adjusted retail sales were down by 4.6% at $7 billion in March. Looking at the non-seasonally adjusted change shows a different picture. Retail sales in March were up by 5.3% from the previous month, notably at grocery stores (31%), building and garden material stores (26%), and at electronics and appliance stores (23%). Compared to the same time last year, BC retail sales were down by 3%.

Given that retailers were closed only starting mid-March, it is expected that the April decline will be higher. Advance estimates provided by Statistics Canada for April indicates retail sales declined by 15.6%. As some provinces begin to re-open, we can expect retail sales to gradually return, but the magnitude will largely depend on consumer demand, which has been cautious in other countries that have started to re-open. Moreover, unemployed individuals and individuals who have had their working hours reduced will likely not be making non-essential purchases in the near future.

Vancouver, BC – May, 2020. The British Columbia Real Estate Association (BCREA) reports that a total of 3,284 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in April 2020, a decline of 50.8 per cent from April 2019. The average MLS® residential price in BC was $737,834, a 7.8 per cent increase from $684,430 recorded the previous year. Total sales dollar volume in March was $2.4 billion, a 46.9 per cent decrease over 2019.

“We expected to see a sharp drop in sales for April as we confronted the COVID-19 pandemic,” said BCREA Chief Economist Brendon Ogmundson. “However, buyers and sellers are adapting to a new normal, and activity should pick up as the economy gradually re-opens.”

While home sales were down by more than half compared to this time last year, the supply of homes for sale, which normally rises through the spring, was down close to 10 per cent on a seasonally adjusted basis and down 23.7 per cent year-over-year. That slide in total active listings means that prices remained firm despite the sharp fall in sales.

Year-to-date, BC residential sales dollar volume was up 9.6 per cent to $15.3 billion, compared with the same period in 2019. Residential unit sales were down 1.7 per cent to 20,164 units, while the average MLS® residential price was up 11.6 per cent to $758,614.